The paired trade of short Tesoro Corp. (TSO), long Valero Energy Corp. (VLO) worked like a machine! I even got "mega kudos" from Phil at PSW, and that holds a lot more cache than a BUY, BUY, BUY from Cramer. I love it when you have the premier company in a sector (in this case Valero) reporting early (so they are a known quantity) and the higher-flying little guys reporting later in the season (so they have all the hot air to lose). TSO is good company, but it rose "too far, too fast." People have got to be wondering about higher multiple Holly Corp. (HOC) at this point (earnings next week).
Adding to my glee yesterday were the E&P names:
- Led by EOG Resources Inc. (EOG) -- up another 0.8%, which may not sound like a lot, but we were half out up 71% on our May 75 Calls and our remaining position is up 157%... in 2 days!
- Followed by another good day for Chesapeake Energy Corp. (CHK) -- uh-oh, is he kidding? see below...
- Petroquest Energy Inc. (PQ) -- up 5% -- good numbers, up guidance, but our calls are still wallowing down 30% after that little pre earnings dip, (I'm likely to roll this one tomorrow to June)
- And Petrohawk Energy Corp. (HK) -- up 1.5% -- solidly through $15 with numbers next week.
On to a review of the day that was as gas rallied on CNBC's "bearish" gas storage report. LOL. I have two words for Epperson: Short Interest. As in there's a record amount of it in the NYMEX natural gas futures and options. Natural gas looks hell bent for $8, and we're at one of those "slice or dive" junctures. Nothing really fundamental (except more buyers than sellers) to drive gas much over $8 but it has great support at $7.50.
Natural Gas Storage Review:
Gas inventories are 20% above the five year average, but 13% below year ago levels.
- Storage as of April 27, 2007: 1,651 Bcf (updated May 2, 2007).
- Max storage for this week in history: 1,904 Bcf (2006). At present gas is at its 2nd highest level in history for this date (we were at our 3rd highest level last week).
- We are now down 13% (253 Bcf) relative to year ago storage levels. Due to the larger injection this past week relative to the year ago comparable week, we eroded the YoY deficit slightly (see second chart below).
- We are now 20% (276 Bcf) above the five-year average which includes 2006's record levels (see third chart below).
Here are some quick stats for the period running from the end of April through the end of October (the traditional end of the injection season):
- Five-year average injections: 1,896 Bcf. Taken with current storage that scenario would put us at a very comfortable 3,547 Bcf in storage, or 87 Bcf over record storage.
- Minimum injections: 1,491 Bcf in 2002. This would yield storage of 3,055. While many consider the 3 Tcf mark to be full storage, 3,142 Bcf would be the lowest peak storage this decade and would be seen as extremely bullish for gas prices (despite the fact that it's well over the 3 Tcf mark which has traditionally been seen as "full" storage).
- Maximum injections: 2,433 Bcf in 2003. That year saw storage trough at a very low 642 Bcf. This won't happen with this year's much higher storage levels going into the injection season.
- Last year we injected 1,546 Bcf into storage during this period which would yield peak storage of 3.2 Tcf at the end of October.
Previously I had thought natural gas would suffer "a little bout of seasonal weakness, potentially falling as low as $6.50." Yesterday's report was only bearish in that it slightly outpaced last year's injection. However, every time gas prices have attempted even a minor slide in the last few weeks, buyers were on the job, I suspect covering that near record net short position.
I'm setting aside thoughts of hurricane-induced spikes and/or several consecutive weeks of excessive heat for now. While current Lower 48 production is up only slightly relative to 2006's storm-impacted volumes Canadian exports to the U.S. are more than likely to decline more than LNG imports will increase. For this and many more little things like: spiralling service costs, increased demand for natural gas from the fertilizer and ethanol industries, low snowpack which reduce hydro electricity generation and thus increases demand for gas for power etc. I don't see natural gas trading on average much above or below current levels of $7.50 to $8 this summer. Put a hurricane aimed at the Gulf in the picture, and we see $9 within a day -- then things get down to storm path and production impact.
Above $7 the well-run E&P has a license to print money:
Chesapeake Energy Corp. (CHK) -- added more Jun $45s before earnings. See earnings watch below.
- Tesoro Corp. (TSO) -- Sold the $120 puts purchased Wednesday at $3.10 for $7.00. The paired trade with Valero Energy Corp. (VLO) worked exceptionally well as it reached an all time record high while Tesoro was busy falling $8.
- Anadarko Petroleum Corp. (APC) -- lost faith in this trade some time ago, it fell off the radar and should have been folded some time ago. Sold down 69%. Stupid. Can you say use stops?
- ConocoPhillips (COP) -- sold down 54%. Ditto comment.
OTHER OF NOTE:
Petroquest Energy Inc. (PQ) rallied on better-than-expected guidance. I've got a long piece in the hopper but have been unable to find the time to complete. All systems go there.
Halliburton Co. (HAL) edging higher as higher natural gas prices through the transitive property (higher natural gas price = swelling E&P cash flow = rising E&P CapEx = happy service company shareholders). Why not pick the most beat-up name of the big cap service bunch?
Patterson-UTI Energy Inc.'s (PTEN) chart looks great and, based on all accounts, business should only get better for many of the land drillers (Parker Drilling Company (PKD), Bronco Drilling Company Inc. (BRNC), etc.) but I'll due a little due diligence over the weekend before moving into that once again hot money group.
Chesapeake Energy Corp. (CHK): Where's the love?! First, to repeat what I said after asked what to do with 15 minutes before the close holding naked calls on the Phil's Stock World site, I said:
Tough call. I am up 57% now on the bid on my two entries: one at $0.85 yesterday and one at $1.85 today. What I SHOULD do is take half off the table and play with their money. P [Phil of PSW] is the option guru so he might say to sell a higher call or buy a protective put. I however operate in the more 2 dimensional space of oil & gas land and I like the chart and the company. As long as natural gas doesn't fall off a cliff, and they don't screw up earnings (which I doubt but it could happen), then I's staying long. But if you have the same profits as I outlined above how do you not sell half? Comment: I of course didn't.
Earnings: Take out the mark to market unrealized hedge loss and it's a beat. $0.87 vs $0.78 expected. That's not the concern here. Either way, it trades on CFPS (which is not affected by the non cash hedge loss), not EPS, so the after-hours sell off last night may be short-lived if that was the only reason for it.
Comment: What is a non cash, mark to market, unrealized hedge loss and why don't I care about it? Oil and gas companies use futures to hedge their production. Periodically, those futures are "marked to the market price" meaning that if they were closed out at the current price this would be your gain (if the price of the underlying commodity fell) or loss (if it rose, which is what happened in CHK's case). It is non-cash because there is no actual loss of dollars (it hasn't even been sold yet, hence the term "unrealized") but it is required by GAAP accounting. 99 out of 100 analysts will not factor this into their estimates as it has nothing, zip, nada to do with the operation of the company.
1Q Production of 154 Bcfe beat guidance range of 150 to 152.5 Bcfe.
Production growth of 14-18% expected for 2007. No change from previous.
LOE increased a little but not bad. 1Q07 $0.93/Mcfe vs $0.87/Mcfe in 1Q06. Guidance was $0.85 to $0.95 so this is a little high considering they topped the production number. They're looking for $0.90 to $1.00 going forward. Still, <$1 /mcfe LOE is by no means high.
They're completing a well a day in the Barnett.
They replaced over 4x total company production in the first quarter doing this.
They're about to accelerate drilling in the Fayetteville Shale now.
More unconventional reserves on tap: Woodford Shale (both in W. Texas and in Oklahoma) activity about to step up.
Deep Bosier (high potential wells) is about to move from 1 rig to 6.
In summary, a very good quarter. I could see an analyst having a bone to pick with them over a little cost creep in the LOE and G&A lines given the pace of growth here and the already low operating cost levels I think those are pretty forgivable sins. The stock got hit for a 3+% in after hours trading and is still down over 2% this morning as I type this. If it stays in the red through the open I'll be adding to my call position.
Odds & Ends:
PetroChina Company (PTR) -- Wow! 7.3 BILLION BOE Discovery!!!??? 3 Billion of it is said to be oil. They announced this last month but the reserves were then thought to be closer to 2 billion barrels. The JiDong discovery is partly onshore and partly in the Nampu Block of Bohai Bay. This could mitigate much of the "demand from China" argument beginning in about two years. It's shallow water and although initial production is likely in a relative short time frame, full development will take longer but would likely yield production in excess of 1 mm bopd. As a point of reference, last year China imported 2.9 mm bopd. (NFX) is probably picking a good time to market it's Bohai reserves.
Analyst Watch: Royal Dutch Shell (RDS.A) upgraded to neutral at BS, GlobalSantaFe Corp. (GSF) and Weatherford International Inc. (WFT) get modest price target bumps at FBR. Western Refining Inc. (WNR) (which I still have half of my original put position on) got cut at BMO to underperform. Thanks BMO!
SPR Watch: Refill, announced just days ago, is now suspended through "at least the end of the summer driving season. DOE said a second round of solicitations for the purchase of 4 mm bbs of oil was rejected because the bids received were too high and thus, a bad deal for taxpayers. And to think I thought they didn't care! The SPR 689 mm bbs out of a capacity of 727.
Nigeria Watch: Shell sees exports restarting in June. It has already restarted some shuttered production but the company is just getting a look at some areas shuttered for a about a year now and has noted considerable facilities damage. In other news, MEND took another 21 hostages.
Good luck today and have a great weekend everybody! Speaking of the weekend, come back on Saturday for the Weekly Wrap!